The winter heating season officially began this month, with U.S. supplies of natural gas roughly 17% below the five-year average for this time of year—sending prices for the commodity to their highest levels since January.

That could presage elevated, volatile prices as temperatures begin to fall.

Supplies in storage “have fallen out of the five-year maximum-minimum range as stockpiles did not build as fast as most analysts had expected this summer,” says Tyler Richey, co-editor of commodity research provider The Sevens Report. “The last time inventories tested the lower end of that five-year range was at the beginning of the year, when futures spiked to a more than one-year high.”

Natural-gas futures
US:NGX18
settled at $3.284 per million British thermal units on the New York Mercantile Exchange on Wednesday. That was the highest finish for a front-month contract since the middle of last winter, on Jan. 24. January’s settlement high of nearly $3.51 was the highest since late December 2016. Similarly, the United States Natural Gas Fund
UNG, +7.07%
which closely tracks movements in the commodity’s price, rose to $26.89 Wednesday, the highest in over a year.

On Friday, November natural gas settled lower by 1.9% to $3.161 per million BTUs, but still posted a weekly rise of 0.6%, while the United States Natural Gas Fund lost 2.1% for the session, ending flat for the week.

U.S. natural-gas supplies in storage “have fallen out of the five-year maximum-minimum range,” says Tyler Richey of the Sevens Report.

Supplies of natural gas were depleted by a cooler-than-normal 2017-18 winter and a warmer-than-normal summer, says Benoit Autier, head of product at exchange-traded fund issuer GraniteShares.

By late April, less than a month after the official March end of the heating season, stocks had fallen below 1.3 trillion cubic feet, the lowest in four years, according to EIA data.

Net supply injections into storage are higher than the five-year average, but average production this year for the so-called refill season, when supplies rise in preparation for the winter spike in demand, is about 15% below the five-year average, says Autier. Also, domestic “natural-gas exports are at record levels due strong demand abroad and relatively cheaper U.S. natural gas.”

The low supply levels that come as a result of all that “may be concerning given forecasts for colder-than-normal weather in the Midwest and Northeast this month and expectations of higher demand this winter versus last winter,” Autier says. Winter weather is expected to be colder overall than last year from the Plains to the East Coast, says Steven DiMartino, lead meteorologist at private forecasting company Weather Concierge. “While an arctic blast or two will be a threat this winter especially from the middle of January through early February, the primary theme will be frequent winter storms.”

In its latest monthly energy report, the EIA said it expects higher average home-heating bills this winter because of higher energy-price forecasts. The agency forecasts a rise of 5% in natural-gas bills compared with last winter. That assumes temperatures in most parts of the country similar to those seen last winter. “While U.S. natural-gas production growth has been strong, up 9.6% year-over-year” based on EIA data through July versus the same period a year earlier, consumption over the same time frame has risen by 12%, says Richey.

“The market should be concerned about inventory levels because of the notable imbalance in supply and demand dynamics right now,” he says. Month to date as of Wednesday, natural-gas futures have climbed by over 9%.

Richey says fundamental factors continue to favor the natural-gas bulls, but warns that the market “tends to get much more volatile in the winter draw season as demand is almost exclusively dependent on weather.” Autier points out that there are some ways the market may avoid a supply shortage. Any sizable reduction in demand due to Chinese tariffs on U.S. liquefied natural gas could allow more natural gas to flow into U.S. inventories, and the growth in production in recent weeks could help prevent a shortage and contribute to lower prices, he adds.

As to whether the winter is a good time to invest in natural gas, Autier says “it may or may not be,” though one thing is certain: “Market expectations of winter natural-gas demand, driven mainly by weather forecasts and expectations, may increase the volatility of natural-gas prices, potentially hurting investors.”

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